Chapter financial System of Malaysia Financial System Structure in Malaysia

Offshore Market 
1. Labuan 
International 
Offshore Financial 
Center (IOFC) 

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5.2 Banking 
System 
The banking system consists of Bank Negara Malaysia (Central Bank of Malaysia), banking 
institutions (commercial banks, finance companies, merchant banks and Islamic banks) and a 
miscellaneous group (discount houses and representative offices of foreign banks). The banking 
system is the largest component of the financial system, accounting for about 67% of the total 
assets of the financial system. 
The summary background information and functions of the institutions mentioned above are set 
out as follows:- 
5.2.1 
Bank Negara Malaysia (BNM) 
Bank Negara Malaysia (the Central Bank of Malaysia) was established on 26 January 1959, under 
the Central Bank of Malaya Ordinance 1958. The objectives of BNM are as follows: 
• To issue currency and keep reserves to safeguard the value of the currency; 
• To act as a banker and financial adviser to the Government; 
• To promote monetary stability and a sound financial structure; and 
• To influence the credit situation to the advantage of Malaysia. 
The objectives of BNM, in essence, encapsulate the importance of promoting economic growth 
with price stability and maintaining monetary and financial stability. 
The introduction of the Banking and Financial Institutions Act 1989 (BAFIA) on 1 October 1989 
extended BNM’s powers for the supervision and regulation of financial institutions and deposit-
taking institutions who are also engaged in the provision of finance and credit.
5.2.2 Commercial 
Banks 
The commercial banks are the largest and most significant providers of funds in the banking 
system. There are currently 24 commercial banks (excluding Islamic banks) of which 13 are 
locally incorporated foreign banks. The main functions of commercial banks are to provide: 
• Retail banking services such as the acceptance of deposit, granting of loans and advances, 
and financial guarantees; 
• Trade financing facilities such as letters of credit, discounting of trade bills, shipping 
guarantees, trust receipts and Banker’s Acceptances; 
• Treasury services; 
• Cross border payment services; and
• Custody services such as safe deposits and share custody. 
Commercial banks are also authorised to deal in foreign exchange and are the only financial 
institutions allowed to provide current account facilities. 
 
 

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5.2.3 Finance 
Companies 
Finance companies form the second largest group of deposit-taking institutions in Malaysia. 
Finance companies were initially governed by BNM through the Finance Companies Act 1969. 
This was replaced in 1989 with the Banking and Financial Institutions Act 1989. There are 
currently 12 finance companies. Finance company business is defined as: 
• The business of receiving deposits on deposit account, saving account or other similar 
account; 
• The lending of money; 
• Leasing business or the business of hire purchase; and 
• Any other such business as BNM with the approval of the Minister may prescribe. 
5.2.4 
Merchant Banks (also known as Investment Banks) 
Merchant banks emerged in the Malaysian banking scene in the 1970s, making an important 
milestone in the development of the financial system alongside the corporate development of the 
country. They play a role in the short-term money market and capital raising activities including 
financing, specialising in syndication, corporate finance and management advisory services, 
arranging for the issue and listing of shares, as well as investment portfolio management. There 
are currently 10 merchant banks in Malaysia. 
5.2.5 Islamic 
Banking 
In Malaysia, separate Islamic legislation and banking regulations exist side-by-side with those for 
the conventional banking system. The legal basis for the establishment of Islamic banks was the 
Islamic Banking Act (IBA), which came into effect on 7 April 1983. The IBA provides BNM 
with powers to supervise and regulate Islamic banks, similar to the case of other licensed banks.
The banking activities of Islamic banks are based on Syariah principles (the Islamic principles). 
The first Islamic bank established was Bank Islam Malaysia Berhad, which commenced 
operations on 1 July 1983. On 1 October 1999, a second Islamic bank, namely Bank Mualamat 
Malaysia Berhad was established. Apart from Islamic banks, other financial institutions also 
offer Islamic banking services through the “Islamic Banking Scheme”.
In terms of products, all Islamic banking entities are offering banking products based on the 
Islamic principles. Table 2 shows the core Islamic principle in banking, the relevant explanation 
and examples of banking products offered. 

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